Difference Between Legal and Equitable Interest

Both legal interest and equitable interest are forms of ownership held over assets. However, there are a number of important differences between the two. It is important to fully understand the differences between legal interest and equitable interest to avoid personal disappointment and financial loss. The article below provides a clear overview of the two terms and, with the aid of an example, highlights the differences between legal interest and equitable interest.

What is Legal Interest?

Legal interest represents an ownership that can be enforced by law. An owner who has a legal interest over an asset is able to take legal action in the event that another party tries to overstep his rights of ownership. The person who has the legal interest over the assets are known to have the perfected right of ownership of the asset and has all the rights and powers to take legal action to secure the possession of the said asset. The main advantage of having legal interest over an asset is the fact that they have unlimited legal remedy if their ownership rights are infringed upon.

What is Equitable Interest?

Equitable interest is where the said party will have a financial interest in the asset in question. An equitable interest holder will be able to enjoy the assets without holding the actual legal title to the asset. The party with the equitable interest will be able to benefit indirectly from any value appreciations in the asset. Any party with an equitable interest in an asset will not be able to reap any financial gain (usually in the form of value appreciation), unless legal title / interest of the asset is obtained. Equitable interest holders are required to honor the terms and conditions set forth by agreements and contracts. However, the main advantage to equitable interest holders is the ability to gain substantial financial benefits after the legal title is obtained, and assets are sold.

What is the difference between Equitable Interest and Legal Interest?

Despite the fact that they both represent a sense of ownership over an asset, legal interest and equitable interest are quite distinct to one another. Legal interest is when a person has ownership over an asset and can legally enforce his rights over the said asset. Equitable interest is when a person can enjoy the use of the asset without legally owning it. The following example clearly explains the differences between equitable interest and legal interest. Amy has agreed to purchase a house from Daniel under a contract that stipulates that Amy (the buyer) will pay the price of the house in installments and once the price has been paid in full, Daniel (the seller) will transfer the deed of the house to Amy. In this scenario, Amy holds the equitable interest in the house as she can live in the house and enjoy it but does not hold legal title to it. Till Amy pays the balance in full, Daniel will hold the legal interest of the house, and once Amy makes the full payment the legal ownership will be transferred to her. In the event that the property has increased in value from the time the agreement was drawn up to the time the last installment was made, Amy can benefit from this increase in value. However, if the value of the property decreased she would suffer a loss.

Summary:

Equitable Interest vs Legal Interest

• Despite the fact that they both represent a sense of ownership over an asset, legal interest and equitable interest are quite distinct to one another.

• Legal interest represents an ownership that can be enforced by law. An owner who has a legal interest over an asset is able to take legal action in the event that another party tries to overstep his rights of ownership.

• Equitable interest is where the said party will have a financial interest in the asset in question. An equitable interest holder will be able to enjoy the assets without holding the actual legal title to the asset.

• The main advantage of having legal interest over an asset is the fact that unlike the equitable interest here they have unlimited legal remedy if their ownership rights are infringed upon.